6 Financial Statements of Banking Companies Financial Statements of Banking Companies BASIC CONCEPTS The banks have to classify their advances into four broad groups (i) ... 6.3 Advanced

6 Financial Statements of Banking Companies

BASIC CONCEPTS

The banks have to classify their advances into four broad groups (i) standard assets, (ii) sub-standard assets, (iii) doubtful assets and (iv) loss assets. Rates of Provisioning for Non-Performing Assets

Category of Advances Revised Rate (%)

Standard Advances (a) direct advances to agricultural and SME 0.25 (b) advances to Commercial Real Estate (CRE) Sector

1.00

(c) all other loans and advances not included in (a) and (b) above

0.40

Sub- standard Advances • Secured Exposures 15 • Unsecured Exposures 25 • Unsecured Exposures in respect of

Infrastructure loan accounts where certain safeguards such as escrow accounts are available.

20

Doubtful Advances – Unsecured Portion 100 Doubtful Advances – Secured Portion • For Doubtful upto 1 year 25 • For Doubtful > 1 year and upto 3 years 40 • For Doubtful > 3 years 100 Loss Advances 100

The secured value of an assets is the realizable value of its security and not its face value or book value.

© The Institute of Chartered Accountants of India

Financial Statements of Banking Companies 6.2

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others’ in Schedule 5 of the balance sheet.

GENERAL

Question 1

Write short notes on Slip system of posting and double voucher system.

Answer

Slip system of posting: Under this system used in banking companies, entries in the personal ledgers are made directly from vouchers instead of being posted from the day book. Pay-in-slips (used by the customers at the time of making deposits) and the cheques are used as slips which form the basis of most of the transactions directly recorded in the accounts of customers. As the slips are mostly filled by the customers themselves, this system saves a lot of time and labour of the bank staff. The vouchers entered into different personal ledgers are summarised on summary sheets every day, totals of which are posted to the different control accounts which are maintained in the general ledger. Double voucher system: In a bank, two vouchers are prepared for every transaction not involving cash—one debit voucher and another credit voucher. This system is called double voucher system. The vouchers are sent to different clerks who make entries in books under their charge. This is designed to increase the quality of internal check.

Question 2 What are the restrictions imposed by the Banking Regulations Act, 1949 on payment of dividend in case of banking companies?

Answer As per Section 15 of the Banking Regulations Act 1949, a banking company cannot pay dividend on its shares until all its capitalized expenses including preliminary expenses, organization expenses, share selling commission, brokerage, amount of losses incurred by tangible assets and any other item of expenditure not represented by tangible assets are completely written off. However, as per the Act, it is permissible for a banking company to pay dividend on its shares without writing off: (i) The depreciation in the value of its investments in approved securities where such

depreciation has not actually been capitalized or otherwise accounted for as a loss.


6.3 Advanced Accounting

(ii) The depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) where adequate provision for such deprecation has been made to the satisfaction of its auditors; and

(iii) The bad debts where adequate provision for such bad debts has been made to the satisfaction of its auditors.

Question 3 Write short note on Classification of investments by a banking company.

Answer The investment portfolio of a bank would normally consist of both approved securities (predominantly government securities) and other securities (shares, debentures, bonds etc.). Banks are required to classify their entire investment portfolio into three categories: a. Held-to-maturity: Securities acquired by banks with the intention to hold them upto

maturity should be classified as ‘held-to-maturity’. b. Held-for-trading: Securities acquired by banks with the intention to trade by taking

advantage of short–term price interest rate movements should be classified as held-for trading. These investments are to be sold within 90 days.

c. Available-for-sale Securities which do not fall within the above two categories should be classified as available-for-sale’.

Banks may shift investments to / from held to maturity category with the approval of the Board of Directors once a year. Banks may shift investments to / from held for sale category to held for trading category with the approval of the Board of Directors. In case of exigency if the shift has been approved by the Chief Executive of the Bank or by the head of ALCO, the same must be ratified by the Board of Directors. Shifting of investments from held for trading category to available for sale category is generally not allowed. However, in case such investments are not sold within the stipulated time of 90 days due to exceptional circumstances such as tight liquidity conditions in the market, extreme volatility etc, the same may be shifted to the available for sale category with the approval of the Board of Directors.

NON-PERFORMING ASSETS AND THEIR PROVISIONING: Question 4 Write short note on Non-Performing Assets.

Answer According to the Master Circular of the RBI dated July 1, 2013 an asset, including a leased asset becomes non performing when it ceases to generate income for the bank.



A non performing asset is a loan or an advance where: i. Interest and / or installment of principal remain overdue for a period of more than 90 days

in respect of a term loan; ii. The account remains out of order in respect of an overdraft / cash credit. An account is

deemed to be out of order if the outstanding balance remains continuously in excess of the sanctioned borrowing power or though where the outstanding balance is less than the sanctioned borrowing limits there have been no credits in the account for a continuous period of 90 days prior to the Balance Sheet date or where the credits are not enough to cover the interest debited during the same period.

iii. The bill remains overdue for a period of more than 90 days in the case the bill was purchased or discounted;

iv. The installment of principal or interest thereon has remained overdue for two seasons for short duration crops

v. The installment of principal or interest thereon has remained overdue for one season for long duration crops

vi. The amount of liquidity facility remains outstanding for more than 90 days in respect of securitization transaction undertaken in terms of the guidelines on securitization issued on 1st Feb 2006

vii. The overdue receivables beyond 90 days from the specified date of due payment, such receivables representing positive market ot market value of a derivative contract

Income from the non-performing assets can only be accounted for as and when it is actually received. Necessary provision should be made for non-performing assets after classifying them as sub-standard, doubtful or loss asset as the case may be. Question 5 Write short note on Classification of advances in the case of a Banking Company.

Answer Banks have to classify their advances into four broad groups: (i) Standard Assets—Standard assets are those which do not disclose any problems and

which do not carry more than normal risk attached to the business. Such an asset is not a NPA as discussed earlier.

(ii) Sub-standard Assets — Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months. In the case of term loans, those where installments of principal are overdue for period exceeding one year should be treated as sub-standard. In other words, such an asset will have well-defined credit weaknesses



that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.

(iii) Doubtful Assets — A doubtful asset is one which has remained sub-standard for a period of at least 12 months. A loan classified as doubtful has all the weaknesses inherent in that classified as sub-standard with added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

(iv) Loss Assets — A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off, wholly or partly. In other words such assets are considered uncollectable or if collected of such low value that their being shown as bankable assets is not warranted even though there may be some salvage or recoverable value.

The classification of advances should be done taking into account (i) Degree of well defined credit weakness and (ii) Extent of dependence on collateral security for the recovery of dues. The above classification is meant for the purpose of computing the amount of provision to be made in respect of advances. Question 6 From the following information find out the amount of provisions required to be made in the Profit & Loss Account of a commercial bank for the year ended 31st March, 2012: (i) Packing credit outstanding from Food Processors ` 60 lakhs against which the bank

holds securities worth ` 15 lakhs. 40% of the above advance is covered by ECGC. The above advance has remained doubtful for more than 3 years.

(ii) Other advances:

Assets classification ` in lakhs Standard 3,000 Sub-standard 2,200 Doubtful : For one year 900 For two years 600 For three years 400 For more than 3 years 300 Loss assets 600



Answer (i) Packing Credit

(` in lakhs)Amount outstanding (packing credit) 60 Less : Realisable value of securities (15) 45 Less : ECGC cover (40%) (18) Balance being unsecured portion of packing credits 27 Required provision : Provision for unsecured portion (100%) 27.0 Provision for secured portion (100%)* 15.0 42.0

(ii) Other advances: (` in lakhs)

Assets Amount % of Provision provision Standard 3,000 0.40 12 Sub-standard 2,200 15 330 Doubtful : For one year 900 25 225 For two years 600 40 240 For three years 400 40 160 For more than three years 300 100 300 Loss 600 100 600 Required provision 1,867

Note : Sub-standard and Doubtful advances have been assumed as fully secured. However, in case, the students assume that no security cover is available for these advances, provision will be made for @ 25% for sub-standard and 100% for doubtful advances.

Question 7 Bidisha Bank Ltd. had extended the following credit lines to a Small Scale Industry which had not paid any interest since March, 2006.



Term Loan Export Credit Balance outstanding on 31.3. 2012 ` 70 Lacs ` 60. Lacs DICGC/ECGC Cover 50% 40% Securities held ` 30 Lacs ` 25 Lacs Realisable value of securities ` 20 Lacs ` 15 Lacs

Compute the necessary provisions to be made for the year ended 31st March, 2012

Answer

Term Loan Export Credit ` in Lacs ` in Lacs Balance outstanding 70.00 60.00 Less : Realisable value of securities (20.00) (15.00) 50.00 45.00 Less : DICGC/ECGC Cover (25.00) (18.00) Net unsecured balance 25.00 27.00 Provision in respect of secured portion (100%) 20.00 15.00 Provision for unsecured portion (100%) 25.00 27.00 Provision required 45.00 42.00

Note: Since no interest has been paid since 2006, the entire balance as on 31st March 2012 can be categorized as doubtful. Hence, provision has to be made at 100% of both the secured and the unsecured component. Question 8 Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which had not paid any Interest since March, 2006:

Term Loan Export Loan Balance Outstanding on 31.03. 2012 ` 35 lakhs ` 30 lakhs DICGC/ECGC cover 40% 50% Securities held ` 15 lakhs ` 10 lakhs Realisable value of Securities ` 10 lakhs ` 08 lakhs

Compute necessary provisions to be made for the year ended 31st March, 2012.



Answer

Term loan ` in lakhs

Export credit ` in lakhs

Balance outstanding on 31.3. 2012 35.0 30.0 Less: Realisable value of Securities (10.0) (8.0) 25.0 22.0 Less: DICGC cover @ 40% (10.0) ECGC cover @ 50% ___ (11.0) Unsecured balance 15.0 11.0

Required Provision:

100% for unsecured portion 15.0 11.0 100% for secured portion 10.0 8.0 Total provision required 25.0 19.0

Note: Since no interest has been paid since 2006, the entire balance as on 31st March 2012 can be categorized as doubtful. Hence, provision has to be made at 100% of both the secured and the unsecured component. Question 9 From the following information find out the amount of provisions to be shown in the Profit and Loss Account of a Commercial Bank:

Assets (` in lakhs) Standard 4,000 Sub-standard 2,000 Doubtful upto one year 900 Doubtful upto three years 400 Doubtful more than three years 300 Loss Assets 500

Answer Computation of provision in the Profit & Loss Account of the Commercial Bank:

Assets Amount (` in lakhs)

% of Provision Provision (` in lakhs)

Standard 4,000 0.40 16 Sub-standard* 2,000 15 300 Doubtful upto one year* 900 25 225



Doubtful upto three years* 400 40 160 Doubtful more than three years*

300 100 300

Loss 500 100 500 1,501

* Sub-standard and doubtful assets are assumed as fully secured as it is logical for a commercial bank to cover itself by adequate security in the making of loans and advances in the ordinary course of business. Question 10 From the following information, compute the amount of provisions to be made in the Profit and Loss Account of a Commercial bank:

Assets ` in lakhs (i) Standard (Value of security ` 6,000 lakhs) 7,000 (ii) Sub-standard 3,000 (iii) Doubtful (a) Doubtful for less than one year

(Realisable value of security ` 500 lakhs) 1,000

(b) Doubtful for more than one year, but less than 3 years (Realisable value of security ` 300 lakhs)

500

(c) Doubtful for more than 3 years (No security) 300

Answer Statement showing Provisions on various performing and non-performing assets

Amount % of Provision ` in lakhs provision ` in lakhs

Standard 7,000 0.40 28 Sub-standard 3,000 15 450 Doubtful (less than one year) On secured portion 500 25 125 On unsecured portion 500 100 500 Doubtful (more than one year but less than three years)

On secured portion 300 40 120 On unsecured portion 200 100 200 Doubtful Unsecured (more than three years) 300 100 300 Total provision 1,723



Question 11 From the following information of details of advances of X Bank Limited calculate the amount of provisions to be made in profit and loss account for the year ended 31.3. 2012:

Asset classification ` in lakhs Standard 6,000 Sub-standard 4,400 Doubtful: For one year 1,800 For two years 1,200 For three years 800 For more than three years 600 Loss assets 1,600

Answer Statement showing provisions on various performing and non-performing assets

Asset Classification Amount Provision Amount of Provision ` in lakhs % ` in lakhs Standard 6,000 0.40 24 Sub-standard∗∗ 4,400 15 660 Doubtful** One year 1,800 25 450 2 years 1,200 40 480 3 years 800 40 320 More than 3 years 600 100 600 Loss assets 1,600 100 1,600 4,134

Note: All assets have been considered as fully secured. Question 12 Find out the income to be recognised at Good Bank Limited for the year ended 31.3.2012 in respect of Interest on advances (` in lakhs) as detailed below:

∗∗ Sub standard and doubtful assets have been treated as fully secured.



Performing Assets N.P.A. Interest

earned Interest

received Interest earned

Interest received

Term loan 240 160 150 10 Cash credits and overdrafts 1,500 1,240 300 24 Bills purchased and discounted 300 300 100 40

Answer Interest on performing assets to be recognized on accrual basis, but interest on Non-performing asset should be recognized on Cash Basis.

` in lakhs Interest on Term Loan (240 + 10) 250 Cash Credits and Over Drafts (1500 + 24) 1,524 Bills Purchases and Discounted (300 + 40) 340 Total Interest to be recognized 2,114

Note: The recognition of income in respect of NPAs on actual receipt is as per clause 3 of the Master Circular of the RBI on the subject dated 1st July 2013 Question 13 Mention the condition when a cash credit overdraft account is treated as ‘out of order’.

Answer A cash credit overdraft account is treated as NPA if it remains out of order for a period of more than 90 days. An account is treated as 'out of order' if any of the following conditions is satisfied: (a) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power. (b) Though the outstanding balance is less than the sanctioned limit/drawing power –

(i) there are no credits continuously for more than 90 days as on the date of balance sheet; or (ii) credits during the aforesaid period are not enough to cover the interest debited

during the same period. Question 14 From the following information of details of advances of Zenith Bank Ltd., calculate the amount of provisions to be made in Profit and Loss Account for the year ended on 31-3- 2012:

Assets classification (`in lakhs) Standard 10,000 Sub-standard 6,400



Doubtful: for one year 3,200 for two years 1,800 for three years 900 for more than three years 1,100 Loss assets 3,000

Answer Statement showing provisions on various performing and non performing assets of Zenith Bank Ltd.

Assets classification Amount (` in lakhs)

Provision (%)

Amount of provision

(` in lakhs) Standard 10,000 0.40 40 Sub-standard 6,400 15 960 Doubtful: for one year 3,200 25 800 for two years 1,800 40 720 for three years 900 40 360 for more than 3 years 1,100 100 1,100 Loss assets 3,000 100 3,000 Total 6,980

Note: It is assumed that sub-standard assets and all doubtful assets are fully secured.

Question 15 From the following information, compute the amount of provisions to be made in the Profit and Loss Account of a Commercial Bank for the year ending on 31-03-2012.

Assets (Category of Advances) ` in Lakhs Standard Advances 7,000 Sub-standard Advances 3,500 (Include secured exposures ` 1,000 Lakhs and balances unsecured exposures ` 2,500 Lakhs includes ` 1,500 Lakhs in respect of infrastructure loan accounts where escrow accounts are available) Doubtful advances- unsecured portion 1,500 Doubtful advances- secured portion



For doubtful up to 1 year 500 For doubtful more than 1 year and up to 3 years 600 For doubtful more than 3 years 300 Loss Advances 200

Answer Statement showing the amount of provisions on Assets:

(` in lakhs) Assets Amount % of Provision provision Standard 7,000 0.40 28 Sub-standard: Secured 1,000 15 150 Other unsecured 1,000 25 250 Unsecured infrastructure 1500 20 300 Doubtful: up to one year 500 25 125 up to 3 years 600 40 240 For more than three years 300 100 300 Doubtful unsecured 1,500 100 1,500 Loss 200 100 200 Required provision 3,093

Question 16 A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been classified as doubtful assets (upto 1 year). Details of the accounts are : Outstanding ` 6,73,000 ECGC coverage 25% (Limited to ` 1,00,000) Value of security held ` 1,50,000 Compute the necessary provision to be made by a Bank as per applicable rates.

Answer

`

Doubtful Assets (upto 1 year) 6,73,000 Less: Value of security (excluding ECGC cover) (1,50,000) 5,23,000 Less: ECGC coverage (limited to ` 1,00,000) (1,00,000) Unsecured portion 4,23,000



Provision: for unsecured portion @100% on ` 4,23,000 4,23,000 for secured portion @ 25% on ` 1,50,000 37,500 Total provision to be made in the books of the bank 4,60,500

Question 17 From the following information of STP Bank Ltd. pertaining to the financial year 2012-13, compute the provisions to be made in the Profit and Loss Account:

` in lakh Assets Standard 30,000 Sub-standard 20,000 Doubtful: For one year (secured) 8,000 For two years and three years (secured) 2,500 For more than three years (secured by mortgage of Plant & Machinery ` 500 lakh) 2,000 Loss Assets 1,700

Answer Calculation of amount of provision to be made in the Profit and Loss Account

Classification of Assets

Amount of Advances

% age of provision

Amount of provision

(` in lakhs) % (` in lakhs) Standard assets 30,000 0.40 120 Sub-standard assets * 20,000 15 3,000 Doubtful assets: For one year (secured) 8,000 25 2,000 For two to three years (secured) 2,500 40 1,000 For more than three years: unsecured 1,500 100 1,500 secured 500 100 500 Loss Assets 1,700 100 1,700 Total provision required 9,820

*Considered as fully secured.



REBATE ON BILLS DISCOUNTED Question 18 The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial Bank Ltd. for the year ending 31st March, 2013:

` (i) Interest and Discounts 1,96,62,400 (ii) Rebate on Bills Discounted (balance on 1.4. 2012) 65,040 (iii) Bills Discounted and purchased 10,67,45,400

It is ascertained that proportionate discount not yet earned on the Bills Discounted which will mature during 2013 - 2014 amounted to ` 92,760. Pass the necessary Journal entries with narration adjusting the above and show: (a) Rebate on Bill Discounted Account; and (b) Interest and Discount Account in the ledger of the Bank. Answer

The Commercial Bank Ltd. Journal Entries

Date Dr. Cr. 2013 ` `

March 31 Rebate on Bills Discounted A/c Dr. 65,040 To Interest and Discount A/c 65,040 (Being the amount of provision for unexpired

discount brought forward from the previous year credited to Interest and Discount A/c)

March 31 Interest and Discount A/c Dr. 92,760 To Rebate on Bills Discounted A/c 92,760 (Being provision for unexpired discount required at

the end of the current year)

March 31 Interest and Discount A/c Dr. 1,96,34,680 To Profit & Loss A/c 1,96,34,680 (Being transfer of closing balance to Profit and Loss

A/c)



(a) Rebate on Bills Discounted Account 2013 ` `. March 31 To Interest and

Discount A/c

65,040 April 1 2012

By Balance b/d 65,040

2013 March 31 By Interest and Discount March 31 To Balance c/d 92,760 A/c (rebate required) 92,760

1,57,800 1,57,800 (b) Interest and Discount Account

2013 ` ` March 31 To Rebate on Bills

Discounted A/c 92,760 April 1 2012

By Rebate on Bills Discounted A/c (opening balance)

65,040 March 31 To Profit & Loss

A/c (transfer)

1,96,34,680 March 31 By Cash and

Sundries

1,96,62,400 1,97,27,440 1,97,27,440

Question 19 From the following details, prepare bills for collection (Asset) Account and Bills for collection (Liability) Account:

` On 1.4. 2012, Bills for Collection were 51,00,000 During the year 2012-13 Bills received for Collection amounted to 75,00,000 Bill collected during the year 2012-13 98,47,000 Bill dishonoured and returned during the year 27,10,000

Answer Bills for collection (Asset) Account

` ` 1.4. 2012 To Balance b/d 51,00,000 2012-13 By Bills for collection

(Liability) A/c

98,47,000 2012-13 To Bills for

collection 75,00,000 By Bills for collection

(Liability) A/c (dishonored bills)

27,10,000

31.3. 2013 By Balance c/d 43,000 1,26,00,000 1,26,00,000 1.4. 2013 To Balance b/d 43,000



Bills for collection (Liability) Account 2012-13 To Bills for collection

(Asset) A/c

98,47,000 1.4. 2012 2012-13

By Balance b/d By Bills for collection

51,00,000

To Bills for collection (Asset) A/c

27,10,000

(Asset) A/c 75,00,000

31.3. 2013 To Balance c/d 43,000 1,26,00,000 1,26,00,000 1.4. 2013 By Balance b/d 43,000

Question 20 The following is an extract from the Trial Balance of Dream Bank Ltd. as at 31st March, 2013:

Rebate on bills discounted as on 1-4- 2012 68,259 (Cr.) Discount received 1,70,156 (Cr.) Analysis of the bills discounted reveals as follows:

Amount (`) Due date 2,80,000 June 1, 2013 8,72,000 June 8, 2013 5,64,000 June 21, 2013 8,12,000 July 1, 2013 6,00,000 July 5, 2013

You are required to find out the amount of discount to be credited to Profit and Loss account for the year ending 31st March, 2013 and pass Journal Entries. The rate of discount may be taken at 10% per annum.

Answer The amount of rebate on bills discounted as on 31st March, 2013 the period which has not been expired upto that day will be calculated as follows:

Discount on ` 2,80,000 for 62 days @ 10% 4,756 Discount on ` 8,72,000 for 69 days @ 10% 16,484 Discount on ` 5,64,000 for 82 days @ 10% 12,671 Discount on ` 8,12,000 for 92 days @ 10% 20,467 Discount on ` 6,00,000 for 96 days @ 10% 15,781 Total 70,159

Note: The due date of the bills discounted is included in the number of days above.



The amount of discount to be credited to the profit and loss account will be:

` Transfer from rebate on bills discounted as on 31.03. 2012 68,259 Add: Discount received during the year 1,70,156 2,38,415 Less: Rebate on bills discounted as on 31.03. 2013 (as above) (70,159) 1,68,256

Journal Entries

` `

Rebate on bills discounted A/c Dr. 68,259 To Discount on bills A/c 68,259 (Transfer of opening unexpired discount on 31.03. 2012) Discount on bills A/c Dr. 70,159 To Rebate on bills discounted 70,159 (Unexpired discount on 31.03. 2013 taken into account) Discount on Bills A/c Dr. 1,68,256 To P & L A/c 1,68,526 (Discount earned in the year, transferred to P&L A/c)

Question 21 As on 31st March 2012, Strong Bank Ltd. has a balance of ` 27 crores in “rebate on bills discounted” account. The bank provides you the following further information: (1) During the financial year ending 31st March 2013, Strong Bank Ltd. discounted bills of

exchange of ` 4,000 crores charging interest @ 15% p.a. and the average period of discount being 146 days.

(2) Bills of exchange of ` 600 crores were due for realization from the acceptors/customers after 31st March 2013, the average period outstanding after 31st March 2013, being 73 days.

You are required to pass necessary journal entries in the books of Strong Bank Ltd. for the above transactions.

Answer In the books of Strong Bank Ltd.

Journal Entries Particulars Debit

(`) Credit

(`) Rebate on bills discounted A/c Dr. 27



To Discount on bills A/c 27 (Being the transfer of opening balance in ‘Rebate on bills discounted A/c’ to ‘Discount on bills A/c’)

Bills purchased and discounted A/c Dr. 4,000 To Discount on bills A/c 240 To Clients A/c 3,760 (Being the discounting of bills of exchange during the year) Discount on bills A/c Dr. 18 To Rebate on bills discounted A/c 18 (Being the unexpired portion of discount in respect of the discounted bills of exchange carried forward)

Discount on bills A/c Dr. 249 To Profit and Loss A/c 249 (Being the amount of income for the year from discounting of bills of exchange transferred to Profit and loss A/c)

Working Notes: 1. Discount received on the bills discounted during the year

` 4,000 crores × 15100

× 146365

= ` 240 crores

2. Calculation of rebate on bill discounted

` 600 crores × 15100

× 73365

= ` 18 crores

(It is assumed that discounting rate of 15% is used for the bill of ` 600 crores also) 3. Income from bills discounted transferred to Profit and Loss A/c would be calculated by

preparing Discount on bills A/c Discount on bills A/c

` in crores Date Particulars Amount Date Particulars Amount 31 March 2013 To Rebate on bills

discounted 18 1st April,

2012 By Rebate on bills discounted b/f

27

” To Profit and Loss A/c (Bal. Fig.)

249

2012-13 By Bills purchased and discounted

240

267 267



Question 22 The following facts have been taken out from the records of Dee Bank Ltd. as on 31st March,2011:

Dr. (`) Cr. (`) Rebate on bills discounted (not due on March 31st, 2010) 45,800 Discount received 2,02,500 Bills discounted 12,25,000

An analysis of the bills discounted is as follows:

Amount Due date Rate of discount ` (i) 3,75,000 April 8 12% (ii) 1,50,000 May 5 14% (iii) 2,20,000 June 12 14% (iv) 4,80,000 July 15 15%

You are required to:- (i) Calculate rebate on bills discounted as on 31st March, 2011. (ii) The amount of discount to be credited to the profit and loss account. (iii) Show necessary journal entries in the books of Dee Bank Ltd. as on 31st March, 2011.

Answer (i) Calculation of Rebate on bills discounted

S.No. Amount (`)

Due date (year 2011)

Unexpired portion from 31st March, 2011

Rate of discount

Rebate on bills discounted (`)

(i) 3,75,000 April 8 8 days 12% 986 (ii) 1,50,000 May 5 35 days 14% 2,014 (iii) 2,20,000 June 12 73 days 14% 6,160 (iv) 4,80,000 July 15 106 days 15% 20,910

12,25,000 30,070

(ii) Amount of discount to be credited to the Profit and Loss Account

` Transfer from Rebate on bills discounted A/c as on 31st March, 2010 45,800



Add: Discount received during the year ended 31st March, 2011 2,02,500 2,48,300 Less: Rebate on bills discounted as on 31st March, 2011 (30,070) Discount credited to Profit and Loss Account 2,18,230

(iii) In the books of Dee Bank Ltd. Journal Entries

Particulars Dr. (`) Cr. (`) (1) Rebate on bills discounted A/c Dr. 45,800 To Discount on bills A/c 45,800 (Being the transfer of opening balance of rebate on bills

discounted account to discount on bills account)

(2) Discount on bills A/c Dr. 30,070 To Rebate on bills discounted A/c 30,070 (Being the unexpired portion of discount in respect of the

discounted bills of exchange carried forward)

(3) Discount on bills A/c Dr. 2,18,230 To Profit and Loss A/c 2,18,230 (Being the amount of income for the year transferred from

Discount on bills A/c to Profit and Loss A/c)

Question 23 Given below is an extract from the trial balance of T.K. Bank Limited as on 31st December, 2012:

Particulars Debit Credit ` `

Bills discounted 12,64,000 ---- Rebate on bills discounted (1.1. 2012) ---- 8,340 Discount received for the year 85,912

An analysis of the bills discounted is shown below:

Amount Due date in 2013 Rate of discount ` (% p.a.) 1,40,000 March 6th 5 4,36,000 March 12th 4.5



2,82,000 March 26th 6 4,06,000 April 6th 4

Show the workings, how the relevant items will appear in the bank’s Profit and Loss account as on 31st December, 2012 and in bank’s Balance Sheet as on 31st December, 2012. Answer

Profit & Loss Account (an extract) for the period ending 31.12. 2012

` Transfer from ‘Rebate on bills discounted account’ (01.01. 2012) 8,340 Add: Discount for the year 2012 85,912 94,252 Less: Rebate on bills discounted carried forward to the year 2013 (13,274) 80,978

Balance Sheet (an extract) as on 31.12. 2012 ` Other liabilities & provisions: Rebate on bills discounted 13,274

Working Note: Statement of rebate on bills discounted as on 31.12. 2012

Due date Amount (`) No. of days after 31.12.2012

Rate of discount (%)

Discount of the unexpired period

March 6th 1,40,000 65 5 1,247 March 12th 4,36,000 71 4.5 3,816 March 26th 2,82,000 85 6 3,940

April 6th 4,06,000 96 4 4,271 Total rebate on bills discounted to be carried forward 13,274

CAPITAL ADEQUACY RATIO Question 24 A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted assets ratio.

(` in crores) Equity share capital 500.00



Statutory reserve 270.00 Capital reserve (of which ` 16 crores were due to revaluation of assets and the balance due to sale of capital asset)

78.00

Assets: Cash balance with RBI 10.00 Balance with other banks 18.00 Other investments 36.00 Loans and advances: (i) Guaranteed by the Government 16.50 (ii) Others 5,675.00 Premises, furniture and fixtures 78.00 Off-Balance Sheet items: (i) Guarantee and other obligations 800.00 (ii) Acceptances, endorsements and letter of credit 4,800.00

Answer

` in crores ` in crores (i) Capital funds – Tier I Equity share capital 500 Statutory reserve 270 Capital reserve (arising out of sale of assets) (78-16) 62 832 Capital funds – Tier II Capital reserve (arising out of revaluation of assets) 16 Less: Discount to the extent of 55% (8.8) 7.2 839.2

` in crores % of weight ` in crores (ii) Risk Adjusted Assets Funded Risk Assets Cash balance with RBI 10 0 0 Balance with other banks 18 20 3.60 Other investments 36 102.5 36.90 Loans and advances: (i) Guaranteed by the government 16.5 0 0 (ii) Others 5,675 100 5,675 Premises, furniture and fixtures 78 100 78 5,793.50



` in crores Credit conversion

factor

Off-Balance Sheet items: Guarantees and other obligations 800 100 800 Acceptances, endorsements and letters of

credit

4,800

100

4,800 11,393.50

Risk Weighted Assets Ratio: Capital fund 100

Risk adjusted assets×

(839.2/ 11,393.50) x 100 =7.37% At present, capital adequacy ratio as per RBI norms is 9%. Therefore, Bank has to improve the ratio by introducing further Tier I capital.

Note: As per RBI Master Guidelines dated 1st July 2013, Revaluation Reserves have been advised to be discounted by 55% PROFIT & LOSS ACCOUNT Question 25

From the following information, prepare Profit and Loss Account of Zed Bank Ltd. for the year ended 31.3. 2013:

(` in ’000) Interest and Discount 8,860

(Includes interest accrued on investments) Other Income 220 Interest expended 2,720 Operating expenses 2,830 Interest accrued on Investments 10

Additional Information: (a) Rebate on bills discounted to be provided for 30 (b) Classification of Advances: (i) Standard assets 4,000 (ii) Sub-standard assets 2,240



(iii) Doubtful assets−(fully unsecured) 390 (iv) Doubtful assets – covered fully by security Less than 1 year 100 More than 1 year, but less than 3 years 600 More than 3 years 600 (v) Loss assets 376 (c) Provide 35% of the profit towards provision for taxation. (d) Transfer 25% of the profit to Statutory Reserve.

Answer

ZED Bank Ltd. Profit and Loss Account for the year ended 31st March, 2013

(` in ’000) Particulars Schedule

No. Year ended on 31st March,

2013 I. Income

Interest earned (W.N. 1) 13 8,830 Other income 14 220 Total 9,050

II. Expenditure Interest expended 15 2,720 Operating expenses 16 2,830 Provisions and contingencies (W.N. 4) 2,513.95 Total 8,063.95

III. Profit/Loss Net profit/(loss) for the year 986.05 Profit/(loss) brought forward Nil Total 986.05

IV. Appropriations Transfer to statutory reserve @ 25% 246.51 Balance carried to balance sheet 739.54 Total 986.05



Working Notes: 1. Schedule 13 – Interest Earned

(` ’000s) (i) Interest and discount 8,860 Less: Rebate on bills discounted not provided (30) Interest accrued on investments (10) 8,820

(ii) Interest accrued on investments 10 8,830

Note: Interest accrued on investments to be shown separately under Interest Earned. 2. Calculation of Provisions and Contingencies

Assets Amount % of Provision Provision (` in ’000) (` in ’000) Standard assets 4,000 0.40 16 Sub-standard assets* 2,240 15 336 Doubtful assets (unsecured) 390 100 390 Doubtful assets – covered by security Less than 1 year 100 25 25 More than 1 year but less than 3 years 600 40 240 More than 3 years 600 100 600 Loss assets 376 100 376 Total provision 8,306 1,983

*Note: It is assumed that sub-standard assets are fully secured. 3. Calculation of provision on tax = 35% (Total income – Total expenditure) = 35% of ` [(9,050 – (2,720 + 2,830 + 1,983)] = 35% of ` 1,517 = ` 530.95 4. Total provisions and contingencies = ` 1,983 + ` 530.95 = ` 2,513.95. Question 26 The following are the figures extracted from the books of New Generation Bank Limited as on 31.3. 2013.

` Interest and discount received 37,05,738 Interest paid on deposits 20,37,452



Issued and subscribed capital 10,00,000 Salaries and allowances 2,00,000 Directors fee and allowances 30,000 Rent and taxes paid 90,000 Postage and telegrams 60,286 Statutory reserve fund 8,00,000 Commission, exchange and brokerage 1,90,000 Rent received 65,000 Profit on sale of investments 2,00,000 Depreciation on bank’s properties 30,000 Statutory expenses 40,000 Preliminary expenses 25,000 Auditor’s fee 5,000

The following further information is given:

(i) A customer to whom a sum of ` 10 lakhs has been advanced has become insolvent and it is expected only 50% can be recovered from his estate.

(ii) There were also other debts for which a provision of ` 1,50,000 was found necessary by the auditors.

(iii) Rebate on bills discounted on 31.3. 2012 was ` 12,000 and on 31.3. 2013 was ` 16,000.

(iv) Provide ` 6,50,000 for Income-tax.

(v) The directors desire to declare 10% dividend.

Prepare the Profit and Loss account of New Generation Bank Limited for the year ended 31.3. 2013 and also show, how the Profit and Loss account will appear in the Balance Sheet, if the Profit and Loss account opening balance was Nil as on 31.3. 2012.

Answer

New Generation Bank Limited

Profit and Loss Account for the year ended 31st March, 2013

Schedule Year ended 31.03. 2013

(` in ‘000s) I. Income: Interest earned 13 3,701.74 Other income 14 455.00 Total 4,156.74



II. Expenditure Interest expended 15 2,037.45 Operating expenses 16 480.29 Provisions and contingencies (500 + 150 + 650) 1,300.00 Total 3,817.74 IIII. Profits/Losses Net profit for the year 339.00 Profit brought forward Nil 339.00 IV. Appropriations Transfer to statutory reserve (25%) 84.75 Proposed dividend 100.00 Balance carried over to balance sheet 154.25 339.00 The Profit & Loss Account balance of `154.25 thousand will appear in the Balance Sheet under the head ‘Reserves and Surplus’ in Schedule 2.

Year ended 31.3. 2013 (` in ‘000s)

Schedule 13 – Interest Earned I. Interest/discount on advances/bills (Refer W.N.) 3,701.74 3,701.74 Schedule 14 – Other Income I. Commission, exchange and brokerage 190.00 II. Profit on sale of investments 200.00 III. Rent received 65.00 455.00 Schedule 15 – Interest Expended I. Interests paid on deposits 2,037.45 2,037.45 Schedule 16 – Operating Expenses I. Payment to and provisions for employees 200.00 II. Rent, taxes and lighting 90.00 III. Depreciation on bank’s properties 30.00 IV. Director’s fee, allowances and expenses 30.00 V. Auditors’ fee 5.00 VI. Law (statutory) charges 40.00



VII. Postage and telegrams 60.29 VIII. Preliminary expenses 25.00* 480.29

*It is assumed that preliminary expenses have been fully written off during the year. Working Note:

(` in ‘000s) Interest/discount (net of rebate on bills discounted) 3,705.74 Add: Rebate on bills discounted on 31.3. 2012 12.00 Less: Rebate on bills discounted on 31.3. 2013 (16.00)

3701.74

Question 27

Following information is furnished to you by Sound Bank Ltd. for the year ended 31st March, 2013

(` in thousands) Interest and discount - (Income) 8,860 Interest on public deposits – (Expenditure) 2,720 Operating expenses 2,662 Other incomes 250 Provisions and contingencies (it includes provision in respect of Non-performing Assets (NPAs) and tax provisions)

2,004

Rebate on bills discounted to be provided for as on 31.3. 2013 30 Classification of Advances: Standard Assets 5,000 Sub-standard Assets 1,120 Doubtful Assets – fully unsecured 200 Doubtful assets – fully secured Less than 1 year 50 More than 1 year but less than 3 years 300 More than 3 years 300 Loss assets 200

You are required to prepare: (i) Profit and Loss Account of the Bank for the year ended 31st March, 2013. (ii) Provision in respect of advances.



Answer

Sound Bank Ltd. Profit and Loss Account for the year ended 31st March, 2013

Schedule No. (` in thousands) Income: Interest and Discount (8,860 – 30) 13 8,830 Other income 14 250 9,080 Expenditure: Interest expenses 15 2,720 Operating expenses 16 2,662 Provision and Contingencies 2,004 7,386 Net Profit/Loss for the year 1,694

Assets Value % of provision Provision Standard Assets 5,000 0.40 20.00 Sub-standard Assets∗ 1,120 15 168.00 Doubtful Assets 100% unsecured 200 100 200.00 Secured: Less than 1 year 50 25 12.50 More than 1 year but less than 3 years 300 40 120.00 More than 3 years 300 100 300.00 Loss Assets 200 100 200.00 Total Provision 1,020.50

Question 28 From the following information, you are required to prepare Profit and Loss Account of Zee Bank Ltd., for the year ending 31st March, 2013 :

` ` Interest and Discount 44,00,000 Interest Expended 13,60,000 Other Income 1,25,000 Operating Expenses 13,31,000 Income on investments 5,000 Interest on balance with RBI 25,000

∗ Sub-standards assets are assumed to be fully secured.



Additional information :

(a) Rebate on bills discounted to be provided for ` 15,000

(b) Classification of advances:

` Standard Assets 25,00,000 Sub-standard Assets 5,60,000 Doubtful Assets not covered by security 2,55,000 Doubtful Assets covered by security For 1 year 25,000 For 2 year 50,000 For 3 year 1,00,000 For 4 year 75,000 Loss Assets 1,00,000

(c) Make Tax Provision @ 35 % (d) Profit and Loss A/c (Cr.) ` 40,000. Give schedule relating to Interest earned only. Answer

Form ‘B’ Zee Bank Ltd.

Profit & Loss Account for the year ended 31st March, 2013

Particulars Schedule No.

Year ended 31st March, 2012

I. Income: Interest Earned 13 44,15,000 Other Income 14 1,25,000 Total 45,40,000 II. Expenditure Interest Expended 15 13,60,000 Operating Expense 16 13,31,000 Provisions and Contingencies (W.N.3) 10,30,813 Total 37,21,813 III. Profit/Loss Net profit for the year 8,18,187 Profit brought forward 40,000 Total 8,58,187



IV. Appropriations: Transfer to Statutory Reserve @ 25% on

` 8,18,187 2,04,547

Balance carried forward to Balance Sheet 6,53,640 Total 8,58,187

Schedule 13: Interest Earned

Particulars ` Interest and discount 44,00,000 Income on Investments 5,000 Interest on balance with RBI 25,000 Total 44,30,000 Less: Rebate on bills discount (15,000) 44,15,000

Working Notes: 1. Provisions for NPA

Particulars Amount % of Provisions

Provision

Standard Assets 25,00,000 0.40 10,000 Sub-Standard Assets∗ 5,60,000 15 84,000 Doubtful assets not covered by security 2,55,000 100 2,55,000 Doubtful Assets covered by security For 1 year 25,000 25 6,250 For 2 years 50,000 40 20,000 For 3 years 1,00,000 40 40,000 For 4 years 75,000 100 75,000 Loss Assets 1,00,000 100 1,00,000 5,90,250

2. Calculation of Tax Tax = 35% of [Total income – Total expenditure (excluding tax)]. Tax = 35% of [44,15,000 + 1,25,000 – (13,60,000 + 13,31,000 + 5,90,250)] Tax = ` 4,40,563

∗ It is assumed that the all sub-standard assets are fully secured.



3. Total amount of provisions and contingencies = Provision for NPA + Provision for Tax + Rebate on bills discounted = 5,90,250 + 4,40,563 = ` 10,30,813

Question 29

From the following information, calculate the amount of Provisions and Contingencies and prepare Profit and Loss Account of ‘Hamara Bank Limited’ for the year ending 31st March, 2013:

` in lakhs ` in lakhs Interest and discount 4,430 Interest expended 1,360 Other Income 125 Operating Expenses 1,331 Interest accrued on Investments 10

Additional Information:

` in lakhs (i) Rebate on bills discounted to be provided for 15 (ii) Classifications of Advances: Standard Assets 2,500 Sub-Standard Assets 560 Doubtful Assets not covered by security 255 Doubtful Assets covered by security For 1 year 25 For 2 years 50 For 3 years 100 For 4 years 75 Loss Assets 100 (iii) Make tax provisions @ 35% of the profit. (iv) Profit and Loss Account (Cr.) brought forward from the previous year 40

Answer (a) Calculation of Provisions and Contingencies

(i) Provision on Non-Performing Assets `in lakhs Particulars Amount % of Provision Provision Standard Assets 2,500 0.4 10 Sub-standard Assets 560 15 84 Doubtful Assets not covered by security 255 100 255



Doubtful Assets covered by security: For 1 Year 25 25 6.25 For 2 Years 50 40 20 For 3 Years 100 40 40 For 4 Years 75 100 75 Loss Assets 100 100 100 3,665 590.25

Note: It is assumed that all sub standards assets are fully secured.

(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure (excluding tax)]

= 35% of [(4,425+125) – (1,360+1,331+590.25)] = ` 444.06 lakhs

Total Provisions and contingencies = Provisions on NPAs + Provisions for tax

= 590.25 + 444.06 = ` 1,034.31 lakhs Hamara Bank Limited

Profit and Loss Account for the year ended 31st March, 2013 Particulars Schedule No. ` in lakhs I Income Interest Earned 13 4,425 Other Income 125 4,550 II Expenditures Interest Expended 1,360 Operating Expenses 1,331 Provisions & Contingencies 1,034.31 3,725.31 III Profit/Loss Net Profit/Loss for the year 824.69 Profit/Loss brought forward 40 864.69 IV Appropriations Transfer to Statutory Reserve @ 25% of 824.69 206.17 Transfer to Other Reserves - Balance carried over to Balance Sheet 658.52 864.69



Schedule 13 – Interest earned I Interest & Discount (4,430 – 15) 4,415 II Income on Investments 10 4,425

Question 30 From the following information prepare the Profit & Loss Account of Jawahar Bank Limited for the year ended 31st March, 2013. Also give necessary Schedules.

Figures are in ` thousands Interest earned on term loans 17.26 Interest earned on term loans classified as NPA 4.52 Interest received on term loans classified as NPA 2.04 Interest on cash credits and overdrafts 38.54 Interest earned but not received on cash credit and overdraft treated as NPA 8.39 Interest on deposits 27.20 Commission 1.97 Profit on sale of investments 11.76 Profit on revaluation of investments 2.76 Income from investments 15.53 Salaries, bonus and allowances 18.75 Rent, taxes and lighting 1.70 Printing and stationary 0.75 Director’s fees, allowances expenses 1.33 Law charges 0.22 Repairs and maintenance 0.18 Insurance 0.30 Other information: Make necessary provision on risk assets: (i) Sub-standard 15.00 (ii) Doubtful for one year 7.00 (iii) Doubtful for two years 2.40 (iv) Loss assets 0.65 Investments 3700



Bank should not keep more than 25% of its investments as ‘held-for-maturity’ investment. The market value of its best 75% investments is ` 9,00,000 as on 31st March, 2013.

Answer Jawahar Bank Limited

Profit & Loss Account for the year ended 31st March, 2013 Schedule ` ’000s I. Income Interest earned 13 60.46 Other income 14 16.49

Total 76.95 II. Expenditure Interest expended 15 27.20 Operating expenses 16 23.23 Provisions & contingencies (Refer W.N.) 1,880.61

Total 1,931.04 III. Profit/Loss (1,854.09) IV. Appropriations Nil

Schedule 13 – Interest Earned ` ’000s Interest / discount on advances bills Interest on term loans [17.26- (4.52-2.04)] 14.78 Interest on cash credits and overdrafts (38.54-8.39) 30.15 Income on investments 15.53 60.46 Note : Interest on non-performing assets is recognized on receipt basis.

Schedule 14 – Other Income ` ’000s Commission, exchange and brokerage 1.97 Profit on sale of investments 11.76 Profit on revaluation of investments 2.76 16.49

Schedule 15 – Interest Expended ` ’000s Interest on deposits 27.20



Schedule 16 – Operating Expenses ` ’000s Payments to and provision for employees - salaries, bonus and allowances

18.75

Rent, taxes and lighting 1.70 Printing & stationery 0.75 Director’s fee, allowances and expenses 1.33 Law charges 0.22 Repairs & maintenance 0.18 Insurance 0.30 23.23

Working Note: Provisions & Contingencies ` ’000s Provision for non-performing assets Sub-standard (15 x 15%) 2.25 Doubtful for one year (7 x 25%) 1.75 Doubtful for two years (2.40 x 40%) 0.96 Loss assets (0.65 x 100%) 0.65 5.61 Diminution in the value of current Investments: Cost 75% of ` 3,700 thousands∗∗ 2,775 Less: Market value (900) 1,875.00 1,880.61

Note: 1. It is assumed that all sub-standard and doubtful assets are fully secured. 2. As per RBI norms, provision of 0.40% should also be made on standard assets.

However, in the absence of value of standard assets, in the question, no provision has been made on it.

BALANCE SHEET Question 31 How will you disclose the following Ledger balances in the Final accounts of DVD bank:

` in lacs Current accounts 700

∗∗ 25% of investments classified as ‘held for maturity’ need not be marked to market as per RBI Guidelines. However, the remaining 75% investments have been marked to market according to RBI Guidelines.



Saving accounts 500 Fixed deposits 700 Cash credits 600 Term Loans 500 Bills discounted & purchased 800

Additional information:

(i) Included in the current accounts ledger are accounts overdrawn to the extent of ` 250 lacs. (ii) One of the cash credit account of ` 10 lacs (including interest ` 1 lac) is doubtful. (iii) 60% of term loans are secured by government guarantees, 20% of cash credits are

unsecured, other portion is secured by tangible assets. Answer

Relevant Schedules (forming part of the Balance sheet) of DVD Bank Schedule 3: Deposits

` in lacs A Demand deposits (700 – 250) 450 B Saving bank deposits 500 C Term deposits (Fixed Deposits) 700 1,650

Schedule 9: Advances

` in lacs A (i) Bills discounted and purchased 800 (ii) Cash credits and overdrafts (600 + 250) 850 (iii) Term loans 500 2,150 B. (i) Secured by tangible assets (bal. fig.) 1,730 (ii) Secured by Bank/Government guarantees (500 x 60%) 300 (iii) Unsecured (600 x 20%) 120 2,150

Schedule 5: Other Liabilities & Provisions

` in lacs Others (Provision for doubtful debts) 10



Profit and Loss Account (an extract)

` in lacs Less: Provision for doubtful debts* 10

Note: The overdrawn extent in Current Accounts will be shown as Overdrafts. *Note: It is assumed that the cash credit has been in ‘doubtful’ category for more than three years, hence provision made at 100%. Question 32 The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-2013 :

`

Interest and discount received 38,00,160 Interest paid on deposits 22,95,360 Issued and subscribed capital 10,00,000 Salaries and allowances 2,50,000 Directors Fees and allowances 35,000 Rent and taxes paid 1,00,000 Postage and telegrams 65,340 Statutory reserve fund 8,00,000 Commission, exchange and brokerage 1,90,000 Rent received 72,000 Profit on sale of investment 2,25,800 Depreciation on assets 40,000 Statutory expenses 38,000 Preliminary expenses 30,000 Auditor's fee 12,000

The following further information is given: (1) A customer to whom a sum of ` 10 lakhs was advanced has become insolvent and it is

expected only 55% can be recovered from his estate. (2) There was also other debts for which a provisions of ` 2,00,000 was found necessary. (3) Rebate on bill discounted on 31-03-2012 was ` 15,000 and on 31-03-2013 was

` 20,000. (4) Income tax of ` 2,00,000 is to be provided.

The directors desire to declare 5% dividend.



Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2013 and also show, how the Profit and Loss account will appear in the Balance Sheet if the Profit and Loss account opening balance was NIL as on 31-03-2012

Answer KLM Bank Limited

Profit and Loss Account for the year ended 31st March, 2013

Schedule Year ended 31.03.2013

` I. Income: Interest earned 13 37,95,160 Other income 14 4,87,800 Total 42,82,960 II. Expenditure Interest expended 15 22,95,360 Operating expenses 16 5,70,340 Provisions and contingencies (4,50,000+2,00,000+2,00,000) 8,50,000 Total 37,15,700 IIII. Profits/Losses Net profit for the year 5,67,260 Profit brought forward Nil 5,67,260 IV. Appropriations Transfer to statutory reserve (25% of 5,67,260) 1,41,815 Proposed dividend 50,000 Balance carried over to balance sheet 3,75,445 5,67,260

Profit & Loss Account balance of ` 3,75,445 will appear under the head ‘Reserves and Surplus’ in Schedule 2 of the Balance Sheet.

Year ended 31.3.2013

` Schedule 13 – Interest Earned I. Interest/discount on advances/bills (Refer W.N.) 37,95,160 37,95,160



Schedule 14 – Other Income I. Commission, exchange and brokerage 1,90,000 II. Profit on sale of investment 2,25,800 III. Rent received 72,000 4,87,800 Schedule 15 – Interest Expended I. Interests paid on deposits 22,95,360 22,95,360 Schedule 16 – Operating Expenses I. Payment to and provisions for employees (salaries & allowances) 2,50,000 II. Rent, taxes paid 1,00,000 III. Depreciation on assets 40,000 IV. Director’s fee, allowances and expenses 35,000 V. Auditor’s fee 12,000 VI. Statutory (law) expenses 38,000 VII. Postage and telegrams 65,340 VIII. Preliminary expenses∗ 30,000 5,70,340

Working Note: ` Interest and discount received 38,00,160 Add: Rebate on bills discounted on 31.3. 2012 15,000 Less: Rebate on bills discounted on 31.3. 2013 (20,000)

37,95,160

Exercise 1. From the following information, prepare a Balance Sheet of International Bank Ltd. as on

31st March, 2013 giving the relevant schedules and also specify at least four important Principal Accounting Policies :

` in lakhs Dr. Cr. Share Capital 198.00 19,80,000 Shares of ` 10 each Statutory Reserve 231.00 Net Profit Before Appropriation 150.00 Profit and Loss Account 412.00

∗ It is assumed that preliminary expenses have been fully written off during the year.



Fixed Deposit Account 517.00 Savings Deposit Account 450.00 Current Accounts 28.00 520.12 Bills Payable 0.10 Cash credits 812.10 Borrowings from other Banks 110.00 Cash in Hand 160.15 Cash with RBI 37.88 Cash with other Banks 155.87 Money at Call 210.12 Gold 55.23 Government Securities 110.17 Premises 155.70 Furniture 70.12 Term Loan 792.88 2,588.22 2,588.22

Additional Information: Bills for collection 18,10,000 Acceptances and endorsements 14,12,000 Claims against the Bank not acknowledged as debt 55,000 Depreciation charges—Premises 1,10,000 Furniture 78,000

50% of the Term Loans are secured by Government guarantees. 10% of cash credit is unsecured. Also calculate cash reserves required and statutory liquid reserves required. Note : Cash reserves required 5.50% of demand and time liabilities; liquid reserves required 24% of demand and time liabilities.

(Hints: Balance sheet total ` 25,88.12 lacs)

2. Following are the statements of interest on advances in respect of performing and non-performing assets of Madura Bank Ltd. Find out the income to be recognised for the year ended 31st March. 2013:

(` in lakhs) Performing Assets Interest Interest earned received Cash credit and overdrafts 1,800 1,060 Term loans 480 320 Bills purchased and discounted 700 550 Non-performing Assets Cash credit and overdrafts 450 70 Term loan 300 40 Bills purchased and discounted 350 36

(Hints: Total income to be recognized ` 3,126 lakhs)


Documents

6 Financial Statements of Banking Companies Financial Statements of Banking Companies BASIC CONCEPTS The banks have to classify their advances into four broad groups (i) ... 6.3 Advanced